Research.LeutholdGroup

Those who follow an investment approach embracing thematic groups, sectors, or industries will enjoy superior results if they construct a universe using narrower baskets. Our GSS process assigns stocks into well over 100 themes, offering the advantages of wider opportunity sets and greater diversification.

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Price momentum is one of the essential factors in a quantitative investor’s toolbox, consistently demonstrating its effectiveness across different asset classes and multiple market cycles.  The dimension of periodicity indicates that time frame is a key determinant of Mo’s potential. Shorter time frames exhibit a reversal pattern, however 9- and 12-month windows show nicely positive results.  Furthermore, Momentum's success at the stock level translates into excellent returns when companies are grouped into sectors and industries. Our research indicates that Mo is at its best when industries are more narrowly defined rather than being applied at the sector level.

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Developed due to the growing interest in private debt and equity, these vehicles offer a degree of liquidity and transparency within a regulated, standardized fund format. While fees and expenses are lofty versus OEFs and ETFs, interval funds’ relatively high current income may be very appealing to some.

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As tactical investors and market historians, we are intrigued by the long cycles of market leadership, always curious to understand what drives these seismic shifts.  One idea that continually pops up in our studies is the notion that bear markets frequently tend to produce changes in asset class superiority.  This study examines the relative performance of three pairs of major asset classes: small vs. large, value vs. growth, and international vs. domestic.  The historical record seems to corroborate our intuitive thesis that bear markets and asset class leadership rotations are connected, either due to changes in fundamentals or market psychology.

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Today’s disproportionate outflow from gold miners even as physical gold continues to attract new money, is the proverbial “canary in the mine” that serves as a warning of looming trouble. When the miners are bleeding assets, investors may wish to take precautions against the impending risk of lower gold prices.

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A synopsis of ten historical bubbles, with price charts detailing the scope and duration of each, beginning prior to the onset of the hysteria through the aftermath of the bursting of the bubble. At the end of these cycles, the asset typically returns to the base trend in place before the insanity took hold. These quick anecdotes may be of particular interest to those whose tenure as professional investors has not yet reached the quarter-century mark.

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Extended bull markets are the primary attraction of equity investing and play an integral role in generating long-term returns.  However, investors must take heed when psychological excesses turn a garden variety bull market into mania-induced price chasing.  Instead of reaping the customary gains offered up by a typical bull, the risk and reward tradeoffs become exponentially larger when exuberance overpowers prudence.  Recognizing the difference between a bull market and a bubble is critical for building a respectable long-term track record.   There are subjective attributes common to most manic equity markets, and although these signposts are not mechanical or quantitative, taken together they tell a coherent story.

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With yesterday commemorating the 25th anniversary of the S&P 500 Y2K peak, it’s worth evaluating the long-term results of the unlucky purchases of U.S. equities occurring at that time. Of course, it’s doubtful that many investors decided to dump their money-market funds and go “all in” on stocks that day. Instead, think of this analysis as a review of how one’s dutiful, monthly 401(k) contribution for March 2000 has likely performed over the subsequent 25 years.

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This essay takes a broader view of Manias, Bubbles, Panics, and Crashes by expanding on these terms, considering the benefits of studying stock market bubbles, and looking for commonalities that mark each phase of a euphoric price cycle.  The most practical reason to study bubbles and crashes is the simple fact that they appear far more often than one might expect. Rational investors may be inclined to dismiss the periodic appearance of bubble conditions as just so much noise and frivolity, leaving us to focus on real world issues like the economy, profits, and expected returns. However, we believe the impact of manias and crashes on investment performance over an entire career is significant to the point of being decisive, and that is the most compelling reason to study the history of financial manias.

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It was 25 years ago this month when the legendary dot-com mania reached its crescendo, entering market lore as one of the greatest bubbles in history. This silver anniversary prompted us to create a month-long series of articles under the banner of “Manias, Bubbles, Panics, And Crashes.” Here we look back at the sheer scale and intensity of the internet craze.

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Defined Outcome and Derivative Income ETFs each offer attractive features in the form of modified payout or income characteristics. However, these benefits come at a cost of limited upside, and a “buyer beware” approach should be taken to weighing their pros and cons. Sustained bull markets reveal the true impact of trading potential upside for considerable benefits in the here and now. This study attempts to quantify the opportunity costs of capped funds using 2023-24 as a particularly harsh test case.

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Broad investor interest has validated the attractiveness of buffer and covered call funds. An important part of understanding these ETFs is having a solid grasp of the upside participation that is sold away. The last two years provided a perfect environment to empirically measure the give-up associated with selling calls.

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This study provides an initial look at 2024 factor returns, paced by a 25% gain for the S&P 500 index. Three factors topped the S&P (one by just a smidgen) while eight fell short, a ratio we will later see is typical for exuberant bull markets. Of the laggards, six trailed the S&P by more than 10% with a seventh just sneaking inside that ignominious cut point, and their shortfalls contributed to an average factor spread of -6.3% for the eleven contenders.  We also find that 2024 was an echo of an even tougher 2023 when the S&Ps 26.3% return was also driven by mega-cap growth, causing nine factors to lag the index with an average shortfall of -9.0%. Two consecutive years with similarly spectacular yet narrow S&P returns led to significant underperformance across our basket of factors and motivated us to try to understand more about this phenomenon.

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The turning of the calendar is a time to reflect on the past year’s returns and analyze the relative performance of various asset classes. For 2024, no matter what equity theme is under the microscope, the yearly recap is bound to point to the very same explanation—Nvidia and mega-cap tech.

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A Collateralized Loan Obligation is a special purpose vehicle designed to hold a portfolio of highly leveraged corporate loans in a structure that modifies the risk profile of the underlying loans.  A CLO funds its asset purchases by issuing securities backed by the loan portfolio.  These liabilities are layered in tranches defined by seniority and credit protection, ranging from AAA to B with a final equity buffer at the base of the capital structure.  CLOs have historically been the province of large asset managers, and it is only in recent years that smaller investors have been able to access CLOs simply and easily through an exchange traded fund.  Viewing CLO ETFs as a new option in our fixed income toolbox, we felt a deeper investigation was in order.

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One of the benefits of exchange traded funds is the ability for investors to access complicated or non-traditional strategies in a simple easy-to-trade wrapper. We recently reviewed covered call funds and buffer funds, two option-based positions that are now available through ETFs. This month, we examine another multifaceted security that has recently become easier to obtain thanks to new ETF launches.

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Information Technology has led the market higher this year, gaining 37% to rank as the leader among all eleven sectors as of November 8th. However, there is a return anomaly within this sector that catches our attention. The S&P 500’s Semiconductor sub-industry has risen 96% while the Semiconductor Equipment sub-industry is up just 9%, miles behind the semiconductor group. The divergence seen in Chart 1 seems hard to fathom given the fundamentally interconnected nature of these two business models.

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With the closely intertwined businesses of semiconductors and semiconductor equipment, it is not surprising that the two industries have historically performed similarly. Yet, in 2024, a colossal disconnect has emerged, with semi-equipment stocks up a paltry 5%, miles behind the booming semiconductors.

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The relative performance of small caps lags the S&P 500 by 75% since 2018, and we wondered why.  Was the Magnificent 7 effect so exaggerated that Info Tech and Communication Services, the sectors at the epicenter of the mega-cap growth boom, created such an overwhelmingly high hurdle that small caps were not able to keep pace with these powerhouse companies?  Alternatively, has small cap weakness been the product of sluggish results across multiple sectors, irrespective of the mega-cap growth issue, such that large caps were superior no matter which direction you looked? We label these two hypotheses as “deep” (relating specifically to the narrow but intense Mag 7 effect in Info Tech and Comm Services) or “wide” (describing failings across most small cap companies and industries) and designed this study to identify the most likely explanation.

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Small caps turned sour in August 2018, and since then, performance has been nothing less than disastrous. Is the enormous shortfall pervasive across small caps in general, or is it due to a top-heavy market with unusually huge returns from a few huge stocks? The answer may be helpful for those contemplating a contrarian position in this unloved corner of the market.

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